Where are those bond vigilantes?

The standard retort to those who say that governments cannot borrow more, forever, has been that if this were so in the short term, then we’d see the bond vigilantes. The interest rates demanded would rise, pushing bond prices down and raising the costs of government borrowing. You know, like has happened in Greece, Ireland, Spain and Portugal….

More accurately, we would see the effect of such bondsters: they would influence prices simply by not buying any bonds, meaning their actions would not be directly visible.

Which leads us to something that, while not an immediate sign of the coming apocalypse, should at least make people give pause for thought.

Based on still to be publicly reported data by Pimco’s flagship Total Return Fund, the world’s largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in “government related” securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28).

To unravel this for you. The world’s largest private sector bond fund now has no holdings at all in the world’s largest bond market, that for US Government debt.

Yes, this is only one bond vigilante but where Bill Gross and Pimco go others tend to follow.

And do note that whether people should not buy, or dump their holdings of, Treasuries based on sound analysis of the full faith and credit of the United States is entirely irrelevant. It matters only whether they will or not. If they do, then interest rates will rise, nipping in the bud a recovery and condemning future generations to paying even more interest on the national debt, soaring as it is as a result of the massive deficit.

It’s not that I want to scare anyone or anything, but we do have one extremely large bond buyer now on strike and it won’t take all that many to do so to make it obvious where those bond vigilantes are and what they’re not doing.